Macfarlane Group H1 2026 Earnings Call Transcript

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Provided by Quartr
September 1, 2026

Key Takeaways

  • Positive Sentiment: Profit recovery is beginning to show results: H1 revenue increased 2% year over year, distribution delivered modest sales and profit growth, and new business momentum rose nearly 40%.
  • Positive Sentiment: Pitreavie returned to profitability in Q2 after its replacement corrugated machine was commissioned, with management reporting continued profitability in July and August and targeting a return to £2 million of operating profit over the medium term.
  • Positive Sentiment: The company maintained its £0.96 dividend and plans to launch a new £6 million share buyback in October, while keeping leverage relatively low at 0.9 times EBITDA.
  • Negative Sentiment: Market conditions remain weak, with Middle East-related input and logistics cost inflation, environmental regulations reducing packaging demand—particularly in retail, where sales fell 6%—and H1 adjusted profit before tax down 9%.
  • Neutral Sentiment: Management is targeting a three-year recovery of distribution operating margins from 4.6% to 7%-8% through industrial-sector growth, pricing discipline and cost reduction, while pausing acquisitions until the recovery is more advanced, potentially revisiting M&A in early 2028.
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Earnings Conference Call
Macfarlane Group H1 2026
00:00 / 00:00

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Operator

Good morning, and welcome to the Macfarlane Group PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q&A tab situated on the right-hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I would like to submit the following poll. I would now like to hand you over to Peter Atkinson, CEO. Good morning, sir.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

Good morning, everybody, and thank you for joining our meeting this morning, where we are here to review the Macfarlane Group's first half results for 2026. I am Peter Atkinson, the Group CEO, and here with my colleague, Ivor Gray, the Group CFO. Let me begin by sharing the agenda. What we will do is, I will start the meeting by talking about the key features of the H1 performance in terms of an executive summary. Ivor will then take you through the numbers in terms of results, cash flow, and review our capital allocation program. I will then put a bit of color to the numbers by talking through the individual business unit performances. We will then talk about sustainability and update you on where we are with the pension scheme. Then I will make some concluding remarks before we turn over to questions.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

Before I summarize H1, let us just remind everybody, I know some of you are new to the business, some of you know the business quite well, but just to remind you what it is we do. Basically, Macfarlane, through its various divisions, work with businesses to cost effectively protect their products through the supply chain journey. We differentiate ourselves by the breadth and depth of our product and service range, the range of products and services that we supply, the depth of coverage that we have across both the U.K. and increasingly into Europe. Then the added value proposition that we offer our customers, and we do more than just product and price. The final thing, just to comment upon, is our focus. Unlike a number of our competitors, we are a pure protective packaging business.s

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

We live, breathe, sleep protective packaging 365 days a year and 24 hours a day. So that is the nature of our business. It operates through two divisions, a specialist distribution division, where we are the market leader in the U.K., and a fast growing specialist Manufacturing Operations business, all in the world of protective packaging, protecting different types of packaging, different types of products across various different market sectors. Let me move on to our recent results announcement and just summarize the key messages. As you all are aware, we had a particularly challenging 2025 following 15 years of consistent profit growth. We entered 2026 with the main focus of the business being on profit recovery, particularly in our distribution business and our Pitreavie business. I will come on to talk about those in a moment.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

I think the results that we achieved in H1 reflect favorably on the progress we are making in implementing recovery actions in the two key businesses. In terms of distribution, and we will put more color on this later on in the presentation, but we saw sales growth of just over a percentage point, more price than volume. That is against a market background where we are seeing increasing headwinds with environmental legislation, which again, we will touch on later on in the presentation. We have seen good margin stability. In fact, our gross margin improved slightly during the period. Most encouraging for us was our new business momentum, almost 40% up on the previous year, and that was following a difficult year in 2025, where despite having lots of new business opportunities and strong new business pipelines, we were not able to convert those opportunities into revenue.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

We have now started to see that coming through in 2026. We have also taken actions to reduce the headcount in distribution. We have reduced our headcount by around about 6%. Half of that was redundancy and half of that was natural wastage. In terms of Pitreavie, obviously 2025 was an awful year for Pitreavie for a whole range of different reasons. The key feature for us in terms of the recovery was replacing the corrugated machine where the tragic incident occurred. That was identified, resourced, purchased, commissioned, and set up within the space of six months, which is quite spectacular to be fair. The good news is that Pitreavie was profitable in Q2. As we go into the second half of the year, we are encouraged by the positive trends we are seeing in Pitreavie.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

In terms of our specialist packaging distribution, our specialist protective packing business, we saw good stability in that business, and as you know, that is the highest margin component of our overall business. We are seeing good stability in that particular sector, helped by the tailwinds of our exposure to defense space and aerospace industry. All this has been achieved against the backdrop of very difficult Middle East conditions, which have affected us in terms of input price increases. As you are probably aware, 30% of what we buy is broadly linked to polymer pricing. We have seen material input price increases on a whole range of our polymer products, and we have been very effective in recovering those from our customers, as reflected in our gross margin stability.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

We have also announced in our half year results the maintenance of the dividend, important to a whole range of shareholders, and also the introduction of our second share buyback program. We had our first share buyback program started in 2025. That will come to an end September, this month effectively. Then we will initiate a new buyback program valued at GBP 6 million, which will start in October and run for 12 months. As we look forward, there is little evidence of great catalysts for market improvement. We have got the environmental headwinds, which we will talk about later on, which will always be affecting our revenue line, particularly in the retail sector. The focus of all our activities is to execute an effective profit recovery program. I think what we are seeing in the first half of this year is the beginnings of that profit program beginning to come through.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

Let me pass over to Ivor, and I'll let him take you through the key metrics.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

Thanks, Peter. I'll just cover off some of the key numbers from H1 2026. Peter touched on the revenue growth, so 2% year-on-year growth, H1 2025 versus H1 2026. That splits down GBP 1.3 million of growth from Packaging Distribution, just over 1%, GBP 1.5 million of growth from our Manufacturing Operations business excluding Pitreavie, just over 5%, and the Pitreavie business with just half a million down year-on-year, which given the trials that business has been through is a pretty strong performance. Overall, GBP 2.3 million of revenue growth, predominantly in our Packaging Distribution and Manufacturing Operations business excluding Pitreavie. That translated to a small reduction in adjusted operating costs of GBP 300,000, Packaging Distribution moved forward GBP 300,000, Manufacturing Operations stayed stable, and Pitreavie understandably was GBP 600,000 below last year.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

Pitreavie made a small loss in the first half of the year versus a profit of about GBP 500,000 in the first half of last year. Packaging Distribution, the flavor of Packaging Distribution is smaller sales growth, good stability in the margins, still some inflation coming through on the cost base. The story in Manufacturing Operations, again, is good sales growth through some of the sector tailwinds that we have in that business. Some margin pressure with some of the cost increases coming through in some of the materials and predominantly increased costs. They were probably the business most affected by the NI and National Minimum Wage increases last year.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

The Pitreavie business, as you said, small sales decline, a significant margin decline because most of the products were in the first quarter, we're still outsourcing a lot of the manufacturing to suppliers until the new machine commissioned and a stable cost base. A 9% reduction in adjusted profit before tax. Again, that's a slight down from the 3% operating, that's because of increased interest costs predominantly related to leases. The most significant of that related to the new Midlands lease that we brought in last year. In terms of the balance sheet, bank debt position is still relatively low at GBP 17.9 million, albeit an increase of GBP 1.8 million from the end of the year, and that's predominantly related to absorption of working capital and predominantly inventories, and I'll cover that in a minute.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

Still relatively low level of debt, as you can see, of 0.9 of EBITDA to net debt. And you can see the pension surplus remains in surplus following the buy-in transaction that was completed on June 29. Again, I'll cover that in a little more detail later on. Despite the reduction in EPS of 9%, we've maintained the dividend at GBP 0.96, so that's the same as last year. And we'll continue to do that as we see the business recovering and profits improving both through the back end of this year and as we move forward into next year. Just covering off the income statement. Peter will cover this off in a bit more detail when it comes to the divisional performance.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

But overall, just touching on a couple of areas, you can see the gross margin stability, and that's really due to that enhancement, small enhancement in the Packaging Distribution gross margins, slight reduction in the Manufacturing Operations gross margins, and a more pronounced reduction in the gross margin in Pitreavie, which is related to what I described earlier, that outsourcing activity to suppliers while we got the business back to operational capacity. You can see operational cost expenses increased by about GBP 1.1 million, and that's predominantly employee-related costs. So we have 3% less employees in the business than we did this time last year. However, that's been offset by inflation, the impact of NI that came in from April 1 last year, some redundancy costs in the first half of the year. Half of the reduction in staff has been done through a small redundancy program of just over 20 employees.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

Actually, some of our business units are performing quite nicely this year. So again, we've got some increased bonus provision coming through this year. So GBP 1.3 million of that increase is related to employees, GBP 300,000 related to increased incremental logistics costs, and that's purely driven by the higher fuel costs and higher outside carriage costs that we're seeing as a result of events in the Middle East. Other costs are down GBP 400,000. So again, trying to keep a tight control on the other costs within the business. Interest rates are up predominantly related to incremental cost of leases. This slide just covers off that kind of reconciliation between the statutory measures and alternative performance measures.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

So you can see the kind of two key areas that we adjust for is amortization related to historic acquisitions and any small adjustments that we need to make related to any deferred contingent consideration. The small adjustments that have come through in 2026 are related to some time value of money adjustments related to the a deferred contingent consideration, which resultantly paid out in full in August this year. So that was GBP 2.6 million was paid out in full to the ex-owners of Polyformes because of the strong performance of that business. But that was paid in the second half of this year rather than the first half. In terms of cash flow, you can see that the business has consumed cash of GBP 1.8 million in the first part of the year.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

Probably the three areas to pick out here are the working capital absorption, and that is really we have had an incremental increase in our stock days of around 49 to 52, so a GBP 2.4 million increase in our inventory levels from the end of last year and GBP 1.7 million compared to June 30th last year. That is predominantly related to us building some stocks to deal with some of the supply chain challenges that we are seeing coming through the Middle East and also some of the pricing increases that we have been pulling through really since April, May this year. So these are kind of elevated inventory levels that I'da expect to see us start to bring down between now and the end of the year.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

Second thing to pick out is obviously tax costs are a bit lower, and that is because last year we had quite a lot of overpayment of taxes and we pay obviously tax in advance on a quarterly basis. Obviously the performance of the business in the first half of the year was relatively strong. Second half of the year, decline quite significantly. Therefore, we quite a significant amount of tax that we had overpaid in the first part of last year, which we have recovered in the first part of this year. Then the last thing to pick out is just some of the CapEx that we have had in the first part of this year, that GBP 1.8 million. Some of the key features are we put solar panels into our Polyformes Manufacturing Operations site, which is actually starting to generate some nice efficiencies in terms of energy usage.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

GBP 400,000 was related to the final payments related to the machines coming into Pitreavie, and we spent GBP 400,000 fitting out a new distribution site that we have got in Ireland. So we had to move from an existing site south of Dublin into a new site on the west of Dublin at the middle part of this year. We spent GBP 400,000 fitting out that new warehouse so that we have actually got room for growth for the future of our business in Ireland. So they are the key features. As I said earlier, net debt levels at GBP 17.9 million, still relatively low. We plan to keep it that way in the short term. In terms of capital allocation, the features here really is clearly we are committed to continuing to invest in the business in terms of capital expenditure, whether that is essential replacement or for value-added investment returns.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

We allocate around GBP 3.5 million to GBP 5 million per year to internal CapEx. We have got a commitment to maintain our dividend levels. We know that the dividend is important to quite a number of our shareholders, and we are committed to maintain those dividend levels. As the EPS starts to recover after the reduction last year, and the reduction in the first part of this year, we see the profitability improving through the second half of this year and into the next two to three years and we will continue to maintain that dividend until the dividend cover restores to somewhere around 2.5 times plus against adjusted EPS. Currently, we are running about 2.1 times. In terms of the remainder of the cash, then we allocate that primarily our focus in the short term is to allocate that to share buybacks.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

And you will notice in the announcement that we will complete the current share buyback of GBP 4 million by the end of September this year. That is about GBP 900,000 of additional spend in the second half of this year. We will commence a new buyback program of GBP 6 million from the October 1st this year. That will be spent over a period of a year. Quarterly tranches of GBP 1.5 million between October 1st this year and the end of September next year. We have allocated that, and really the focus on share buybacks rather than M&A at the moment is really reflective of our view of the current valuation of the business and also the fact that the management team is focused on the profit recovery program.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

As we see valuations improve and as we see the profit recovery advance more as we go through next year, then we will look to get back on the front foot with the M&A activity once we can demonstrate that we have got that recovery program more advanced and once we can start to see the valuations improve in the market. I will hand back to Peter now, who will go through the performance of the individual divisions.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

Thanks, Ivor. Let us start with the distribution division. The key points to note from our first half performance, is we have achieved sales growth and profit growth. The sales growth has primarily been price driven rather than volume. Although we have seen good new business performance, I mentioned earlier on about 40% up. Why is our new business performing so strongly at the moment relative to the previous year? Firstly, we are finding customers looking in an uncertain world for suppliers who give them reliability and certainty. Clearly, we fill that gap nicely. We are also seeing now the benefits and investment we made in 2025, and we brought on some strong new business people during the year. We thought they would impact the business in 2025 and they are now coming to fruition in 2026. Also the breadth of the product offer.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

We are doing more work combining our Packaging Distribution offer and our Manufacturing Operations offer with certainly key customers in the industrial sector. That is helping support our new business growth. Finally, we were finding it more and more difficult as customers get tighter and tighter on their costs and control budgets of getting customers into our innovation labs, which as most of you will know, is a key part of our sales proposition. We have done a lot more work in 2026 in taking the innovation lab out to customers. That has helped in terms of our new business performance. I guess the point to note, as I mentioned earlier on, is that despite the new business performance, we are seeing this headwind of environmental legislation, which is slowing down and getting customers to reduce the amount of packaging they are using, particularly in the retail space.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

And if you look at our major retail business in the first half of the year, that's down by 6% versus the same period last year. A key component of that is customers looking to buy less packaging in line with the environmental legislation that is penalizing them if they use too much packaging and the wrong type of packaging. That, as I repeat, will be a constant headwind going forward. We've done effective management of the polymer-based input price increases. We've seen certain polymer-based products go up to 20%, up to 40%, things like stretch, some tape products, bubble wrap, and so on and so forth. But I think we've done a pretty effective job so far in managing those with customers, and that's impacted with the stable gross margin during the period relative to last year. I think we've touched on headcount reductions.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

We're squeezing the distribution business. We're taking heads out and realigning work. We are canceling projects or delaying projects to just get very tight on this profit recovery. The next slide just shows you our margin evolution over really the last five or six years, and a lot of information on this slide. I'll just pick out a number of things for you. First thing to note is that in terms of the first half, in terms of distribution, we have seen our net margin improve, which is positive versus the same period previous year. We've not got polymer on this graph, but we've seen an explosion in polymer prices, and corrugate is relatively stable. There's been a little bit of pushing upwards in the first half of the year.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

Our operating costs are broadly flat on last year if you take into account the redundancy program initiation, the redundancy cost as part of that. As you can see, it reflects our stable gross margin. As you know, and I'll talk about this later on in the presentation, our objective here is to get our net margin back to 7%-8%, which we were delivering on average in the period 2021 to 2024. If I move over the page, I've got a little bit more detail here for you in terms of our cost breakdown. I just talked about the cost inflation that we got and how we're managing that. We instituted the redundancy program distribution, which has taken a number of heads out of the business.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

The good news, and I think it is good news, is that we've got likely a bigger bonus payout this year because we have got a number of sites performing extremely well. So part of the year-on-year difference is the bonus provision. Continuing increase with National Insurance costs. Last, we've got some property cost reduction, but that's really the effect of the duplicated property costs that we had in 2025. So underlying property costs still increase as landlords put up rents, and we get local authorities putting up rates. Then transport costs are slightly higher than last year, and that's predominantly related to fuel costs vis-à-vis the Middle East activities. The next page details, and again, a lot of information on this chart. It details the elements of our profit recovery plan.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

We're getting this business from where we are today back to the 7%-8% that we see as the base point and which we were delivering in 2021 to 2024. A number of things to pull out of this slide. Firstly, we are pivoting the business away from retail towards industrial. Industrial markets for us are more stable. The customers are less transient, and the margins we earn from industrial customers are 2%-3% higher than our retail customers. As I mentioned earlier on, retail is that market which is more affected by the environmental legislation in the current situation than industrial is. The split currently is 80/20. It's not a handbrake turn, but our new business focus is very much around industrial, and we'll see that mix over time slowly begin to change. The other key part of our profit recovery plan is pricing disciplines.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

Within our local core customers, so we have major core local different types of sizes and geography of customers, and particularly our local core customers across the U.K., we have quite a band of different margins that we earn at a gross level. We're doing work at the moment to try and improve the margins we earn across all the bands, across all the sites to at least the average for the business as a whole. We've talked about the H1 cost reduction, and we expect that to flow through during the remainder of 2026, and we've got more cost reduction plans that we're working on as we speak. Then we have a program called RDC Best Practice.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

At the moment, we've got a number of sites performing extremely well with net returns above 10%, and we've got a number of sites performing not as well with net returns below 5%. What we're working on at the moment is best practicing the sites, comparing the really good with the relatively weak, and then working out what changes that we need to make in terms of customer mix, in terms of pricing, in terms of resourcing, in terms of geographic distribution, and all those things will help to improving the operating margin of the business and get us back to this 7.5%-8%. Why is that a realistic number? It's because we've achieved it in the past. Why is it a realistic number? Because we've got some of our sites that are performing well way beyond that number already.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

If we can get all our sites performing to the average, then we should be on track to get back to that 7.5%, 8%. Moving on to our Manufacturing Operations, I'll talk firstly about our specialist operations, which don't include Pitreavie. Good progress during the period. Slightly missing gross margin. Profits are broadly flat, but we're happy with the way this business is performing. It's got a little bit of tailwind from our exposure to defense, the aerospace, and the electronics industry, and a little bit also into the space industry. Nevertheless, it's still dealing with the same conditions that we got within our distribution business. But they've got more of a tailwind than a headwind at the moment.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

We are pretty happy with the way that business is performing, and we expect that sort of level of margin that we delivered from the business to be sustainable in the medium term. Moving over to Pitreavie, you are very aware of what happened in 2025, very difficult for everybody involved, and obviously a tragedy for the family involved in that particular incident. We are managing through that as we speak. We have got the replacement machine in. We have had a lot of customer visits during Q1 to see the machine as it starts up, and more during Q2 as we see the machine performing against all its expectations. Although the business was unprofitable in the whole of H1, it was profitable in Q2 of H1. We are exiting H1 with the business profitable, having got the machine up and running.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

We have done a really good job in retaining customer loyalty during the period, despite the fact we were outsourcing work, and using external suppliers to keep customers running. Those customers have now come back to us, and there is no major or even medium-sized customer that we have lost during this period. I think we have got some good recovery actions in place in terms of Pitreavie, and I have obviously got the benefits of knowing what my July and August numbers look like. Pitreavie is continuing to come through in terms of delivering profitability during those months as well as the Q2 in H1. Let me touch on the health and safety investigation in relation to the incident. You are aware that health and safety have been obviously reviewing what happened. They have not yet fully started their investigation, so we are waiting for them to confirm when that investigation will start.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

We have no more information that we can communicate at the moment on any possible fine. Obviously, we obviously want to keep you briefed. At the moment, there is just no information that is available to share with you, but obviously, we will keep you briefed as more information starts to flow. In terms of the Pitreavie recovery plan, again, relatively busy chart, a number of points to pull out. Firstly is getting the machine up to its optimum level of throughput. We are currently running just under 80,000 per day in terms of the corrugate throughput. Our objective is to increase that to 100,000, and this is square meters we are talking about. We are on track to do that as we come through into Q3.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

That will give us the security of being able to ensure that all our customers are supported and serviced during that period and give us the potential for growth also. Second point in terms of recovery plan is as we service effectively our external customers, then we will switch into using some of that capacity to service in-house Macfarlane sites to provide security of supply and corrugate. We started that activity when we bought the business, but we obviously had to put it on hold as the business went through its difficulties. As we come through into hopefully the end of third, fourth quarter, we will start to look at using Pitreavie to supply corrugate to in-house Macfarlane operations. The third point is, as I'da touched on, the end of outsourcing to third parties. That is now almost completed.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

It certainly will be completed as we are now into Q3. Our medium-term objective for Pitreavie is to get it back to the GBP 2 million of operating profit that we effectively acquired when we bought the business. That gives us the benchmark to start growing the business beyond the 2 million, which from our point of view is a starting line. Let me move over to, we talked about environment quite a bit in terms of the headwind it is delivering, particularly in the distribution business. Let me pass over to Ivor and he can touch on what is happening in the world of environment and how it is impacting the business and how we are addressing it.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

Thanks, Peter. Peter has covered quite a lot of the customer challenges with sustainability. This slide covers quite a lot of stuff that we have maybe already covered in the few results, but just want to pick out one or two features on this slide. One, we have invested in the solar panels at the Polyformes business. As I said earlier, that is quite a nice investment. We are quite a high consumer of energy, so therefore that gives us quite a bit of energy efficiency, but also it takes quite a bit of carbon out of our footprint. The other thing to note is you have noted that we have invested in electric vehicles over the last number of years. I think to be fair, we have probably been at the front end of that investment relative to the industry.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

Clearly these trucks have been coming in at a more expensive cost than the diesel trucks. But we felt it was the right thing to do to move forward so we could trial these vehicles out, see the levels of efficiency, see the levels of range, see the challenges we have with infrastructure. It is pleasing to see that some of the latest developments in electric vehicles are seeing, one, the range extension now in some of these vehicles is actually getting quite significant. So some of the technology improvements that have been made. Also actually from a cost point of view, some electric vehicles are now coming in very cost effectively against diesel vehicles. So hopefully over the next few years, you will gradually see that transition from diesel to electric start to accelerate. Clearly those advancements in technology and advancements in range.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

The only caveat there is infrastructure is still a challenge because obviously every site, you do not necessarily have the input of electricity to be able to charge up the vehicles. So that remains a bit of a challenge for us as it does for many companies. The only other thing I just want to pick at here, which I am covering off in the next slide in more detail, is basically from a regulation point of view, clearly there are some developments there. The most recent regulation that comes in that affects a number of our customers is PPWR, which is a EU legislation. I will just cover that off here. You can see on the left-hand side some of the regulation that is already going through. I think we have covered Extended Producer Responsibility in quite a lot of detail in prior presentations.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

The one in the middle there is probably the most important one. This is a new piece of legislation, EU legislation, and that is really all-encompassing, and that is going to come in in phases over a number of years. The ultimate aim is really across the EU is to have a standard which is looking at ultimately reducing unnecessary packaging, increasing recyclability rates, and improving traceability, and actually looking to eliminate some forms of packaging that are considered non-environmentally friendly. This does not just impact retail like Extended Producer Responsibility, that came in in the U.K. last year. This impacts all packaging. It impacts us because we get quite a number of customers that actually are packaging that then goes into the EU market.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

Actually, quite a number of our customers are multinational customers, and they want to standardize their packaging, so they do not want to have packaging that they use in the EU market and packs they use in the U.K. market. Of course, 8%-10% of our business is actually in the EU, with our operations in Germany, Netherlands, and Ireland. I think this legislation, just given the kind of all-encompassing aspect of it, will have quite a significant impact on the business over the next few years and certainly have a significant impact on quite a number of our customers who either have businesses in the EU or have quite a lot of cross-border transactions between the EU and the U.K. So that will develop quite nicely.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

The ultimate aim is the EU is to try driving down the use of packaging, driving down the, I suppose, unnecessary packaging, so i.e. too much void in the pack, and also moving to more environmentally friendly packaging. So more to come, but that is probably the biggest piece of legislation, and that started off in August this year. In terms of pensions, I am just touching that. Clearly, the kind of biggest change in pension this year is we completed a buy-in transaction on the 29th of June, where all the assets were effectively bought over by Royal London. I suppose in essence what that means for our members, it gives members much more security. Their benefits remain the same, so their benefits are totally unchanged. But instead of relying on Macfarlane Group as a covenant, they are now relying on Royal London as a covenant.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

Now, although Macfarlane Group is a good covenant, Royal London clearly is a very strong covenant, so it gives members a lot more security in terms of going forward. There is some excess assets you can see post that buy-in. So effectively what happens is the insured assets now effectively manage all pensions and payment and any deferred pensions that are due to be paid. So any volatility related to those pensions are now covered by those insured assets. It takes a lot of volatility in terms of the discount rate, in terms of inflation, in terms of mortality assumptions. It takes a lot of volatility out of the group. The only thing that the pension scheme now has to deal with over the next two years is dealing with a lot of equalization adjustments related to guaranteed minimum pension and some historic Barber equalisation adjustments.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

These need to be dealt with over the next two years. We have made provisions for those within our assumptions and also the fees that are required to be paid to correct those pensions. So that GBP 5.5 million of cash that you see, that is there to cover those adjustments and the fees related to managing the pension scheme over the next two years between buy-in and buy-out. What we are kind of predicting at the moment is between now and buy-out, we should be in a position to exit the scheme completely, either within a range of plus a million to minus a million in terms of potential cash that we might either recover or cash that we might have to pay into the scheme. That is the kind of range we are working with between now and buy-out.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

Good progress, more security for members, and less volatility for the group, with the ultimate aim within two years is to get the pension scheme completely off the balance sheet. On that note, I will pass back to Peter who will just do a quick summary and conclusions.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

Thanks, Ivor. One more slide and then we will move on to questions. Three key final messages. Firstly, not easy out there at the moment. Market conditions are weak in the U.K. We have got the impact of the Middle East, slowing down, further slowing down demand, and obviously affecting our input pricing. We have to work hard with customers to get recovery on those. We have got the headwind of the environmental regulation, which will cause people to use less packaging going forward, particularly in that retail sector. I think when we look at what we have achieved in H1, we have made some progress. Middle East impact largely being offset by managing those price increases. Packaging Distribution, we have seen performance improvement. Pitreavie Group are back into profitability, and Manufacturing Operations are performing in a stable fashion. The focus for us continues to be our profit recovery.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

We had a number of people asking us last week when we were talking with them about what is the plan in terms of acquisitions. Just to clarify that, clearly acquisitions has been a key part of our strategy up to date in terms of consolidating and widening the offer to customers. At the moment, we have got all acquisition activity on hold. Those target acquisitions that we have got in the pipeline, we are talking with the owners of those businesses. In the main, they are agreeing to different timings and managing delays. Where acquisitions come to us at the moment, unless they are absolutely must-do acquisitions, then we are effectively saying now is not the right time. I think from an acquisition point of view, not a priority at this particular point in time.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

Expect us to be back on the acquisition trail early 2028, is what we are scheduling as we focus management time on the profit recovery. In terms of that profit recovery, just as a reminder of things that we are doing. So focusing on sales development in industrial markets, particularly in distribution, reducing our cost base, and we started that program as we described it, increasing the performance of the lower return on sales RDCs in distribution through the RDC Best Practice program, improve the input prices that we are achieving despite the Middle East thing, we are refining our sourcing program, trying to find ways of getting better input prices, particularly on corrugate products. Then clearly getting the Pitreavie business back to the GBP 2 million of operating profit that we had when we acquired the business.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

In terms of capital allocation, just to repeat what Ivor said, maintenance of the dividend, instituting a new share buyback program and continuing that net debt level at a relatively low one times EBITDA. So in terms of the presentation, the presentation, it is not already up on the website. Will be up on the website later on today, so you can delve into it in a bit more detail. I recognize we have run through that at quite a pace. We will now move on to questions.

Operator

That is great.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

Yeah, thanks, Peter.

Operator

Thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the Q&A tab situated on the right-hand corner of your screen. Just while the company take a few moments to review those questions submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via InvestorMeetCompany afterward. As you can see, we have received a number of questions about today's presentation. Can I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

Okay, thanks. The first question was one really, and I think we kind of covered it off in the slide around the profit recovery program around distribution, which was really how do we get the business from 4.6% to 7.5% in the medium term. I think Peter covered the actions, but I suppose ultimately, if we can get the business growing roughly about 3% per annum, which is where we're targeting to get to, and we can maintain the gross margins at the current level, really, if we can hold the cost base, which is the challenge for us, hold the cost base at the current levels, then within a three-year program, we should see the bottom line operating margin improve to that 7% to 8% level. Just that natural flow-through of organic growth, maintain the gross margin and stopping that inflationary pressure on the cost increases.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

We appreciate there'll be continued to be inflationary pressure there, but we will be taking active actions to try and reduce our cost base, whether that's looking at kind of site consolidations as leases come up to an end, looking at software technology investments as we go forward to try and reduce some of the processing strains on the business. But ultimately, that's how we get the business from 4.6% to 7.5%, is that natural flow-through of the growth, holding the operating costs where they currently are and maintaining the margins roughly where they currently are at the moment. One of the questions probably for you, Peter, just in terms of the Middle East, what extent have we been able to recover the costs that will come through, as a result of the Middle East?

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

Do you see some maybe potential margin pressure coming through in the second half of the year?

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

Yeah, it's a good question. So far we've managed to do an effective job in recovering those price increases. You can see that in the way our gross margin has performed in the first half of the year. We probably see as we go into the second half of the year, a slight weakening of that gross margin. That will be offset by the fact that because we'll be implementing these price increases, as a result of the flow-through, we'll see our revenue line strengthen. So, if you look to the second half of the year, expect a year-on-year stronger sales line, versus 2025, but probably a slight weakening of margin, not materially so, still within that type range that we operate. But so far we're doing a good job.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

One of the key things is obviously security of supply, because you do not want to let down any customers in the current market because if you let down a customer, it just opens the door for a new entrant. So far, we've been able to manage the supply chain particularly effectively.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

The next question is around M&A. So it's really, maybe I'll pick this one up, is when do we see M&A feature again, and is it likely to be focused on Europe versus the U.K.? I suppose in direct answer to that, we're not putting a timescale on it. Clearly at the moment, our focus given, as I said, the current valuations that we've got at the moment, both of acquiring businesses relative to our own valuation, we see allocating capital to buyback is a more efficient way, to manage our capital in the short term. As Peter described earlier, our kind of management resources are really focused on the profit recovery program.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

But as we hope to develop that profit recovery program over the next 18 months and hopefully valuations start to improve, if those features start to move in a positive direction, then clearly the timing of that means that we'll get on the front foot with M&A activity. Actually, we're focused on both continuing to do some buy and build within the U.K. and we continue to look for strategic opportunities in Europe. I don't know if you want to add to that, Peter.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

No, I think that's a fair summary. The only other thing I'd add to it is that the acquisition opportunities are there for us. We're probably seeing a couple acquisition opportunities a week come through at the moment. As we've said, we only buy quality businesses against an agreed strategy and against an agreed profile. There's nothing we've seen so far that fits those criteria. More to come on acquisitions, but management time, at the moment, is focused on profit recovery.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

In terms of the wider protective packaging market, where do you see the kind of opportunities and threats currently, and how do you see Macfarlane delivering against the wider market?

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

Yeah, I think the wider market, if you look at it, people are trying to find ways of using less packaging. People are trying to find ways of using packaging more effectively. People are trying to find ways of using packaging in a way that reduces their operating costs. So, we're still very confident that the Macfarlane proposition around adding value to people's protective packaging requirements is still relevant, and that's reflected in our new business performance in the first half of this year. I think in terms of the segments of the market, we see defense, aerospace, space, and tech, for the reasons that we all understand, will continue to be pretty robust. Potentially, as they are doing at the moment, give us sustainable tailwinds.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

We see the retail space is probably the space that's going to be most difficult and most challenging, primarily because all the legislation that's currently in play and the legislation that Ivor touched on, which is coming into play, all has a really material effect on that retail space. Hence the pivot that we're making at the moment to really focus our business around industrial. The industrial customers, as a final point, is good for us because it allows us to blend our distribution business and our specialist Manufacturing Operations activity together, so we can deal with a customer's more simple protective packaging needs and also their very sophisticated packaging needs and genuinely become a one-stop supplier to those industrial clients.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

A question on sourcing, Peter. How do we refine our sourcing strategy more and the financial benefits that we could get from that?

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

In round terms, 50% of what we buy, we buy centrally through a central team. That is where we buy bubble wrap and tape on a central basis, agree terms, and all our business units buy from that centrally agreed contract. Then 50%, we tend to deal with local and regional suppliers, and that is managed by our local sites and our regional operations. The plan going forward is to bring more of our regional purchasing into a centralized fashion so that we can get a better bang for our buck and spread our resources more effectively. Also create stronger strategic supplier relationships that, as you are all aware, the corrugate industry at the moment is going through a period of consolidation and rationalization. What we are doing at the moment is building and strengthening our relationships with key corrugate suppliers.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

From a sustainability going forward, we have got long-term relationships and long-term partnerships which will work well for them and for ourselves.

Ivor Gray
Ivor Gray
CFO at Macfarlane Group

Okay, Peter, I think that is all the questions. Okay, do you want to bring it

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

Yeah. Thank you everybody for your time today and your questions. As I say, the presentation will be up on our website, so you will get a chance to look into it in more detail. Clearly, if there is anything that comes out from that, you can contact us directly all through Shore Capital. The summary of the first half year is, look, we had a really difficult 2025 after 15 years of consecutive profit growth. The focus is on profit recovery, and we are beginning to demonstrate those profit recovery actions are coming through, and that is reflected in the performance that we have seen in the first half of the year. That will only strengthen as we go into the second half of the year.

Peter Atkinson
Peter Atkinson
CEO at Macfarlane Group

We have got clear recovery targets for each of the key businesses that are not performing to plan at the moment in terms of distribution and Pitreavie, which will see us through the next two, really, 12 to 24 months. Again, thank you for your time.

Operator

That is great. Thank you for updating investors today. Can I please ask investors now to close this session as you will now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete and I am sure will be greatly valued by the company. On behalf of the management team, we would like to thank you for attending today's presentation, and good morning to you all.

Executives
    • Peter Atkinson
      Peter Atkinson
      CEO
    • Ivor Gray
      Ivor Gray
      CFO
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